Tuesday, June 9, 2009


The Chrysler Bankruptcy

Here's what seems to be going on. There are two values to the assets being sold. One is the liquidation value-- say, 1 billion dollars. The second is the going-concern value-- say, 10 billion dollars. (Both of those numbers are guesses: the Indiana Pensioners might go as high as 2.6 and 25 in their estimates.) The Court used the liquidation value, 1 billion dollars. If that is the value of the assets, then the creditors, getting 2 billion, are better off because of the deal.

The Indiana Pensioners argue that the Court should have used the going concern value, the 10 billion dollars. If the assets could be sold for 10 billion instead, then they and other creditors are hurt by the sale.

There is only one buyer at present-- the Fiat-government-union coalition. A big issue is whether there are other potential buyers. Let us suppose there are not.

Judge Gonzalez argued that since there is one buyer, and without that buyer the company would be liquidated and creditors would get just 1 billion dollars, the 2 billion dollar price is a fair deal.

The Indiana Pensioners argue that Judge Gonzalez should have used the going concern value.

The Indiana Pensioners are closer to the truth. The creditor's manager is supposed to sell the assets for as good a price as he can get. He could liquidate and get 1 billion, clearly a bad option. If he sells, he must negotiate a price. That price is the result of bargaining. It would lie between 1 billion-- the least he would accept--- and 10 billion-- the most the Fiat-government-union would pay. In this light, 2 billion looks like a bad price. The creditor's manager has not done a good job bargaining.

Why didn't he? His incentives create a further problem. He is supposed to be acting on behalf of all the creditors, and he did get over 90% to sign on to the deal. But most of those creditors are banks who exist at the discretion of the government that controls the TARP money and capital regulations. Thus, we would expect those creditors to agree to a bad sales deal in the relatively minor sphere of their Chrysler investments.

There might be an unclarified point of law here. The point is what price is fair for an asset sale by a company in the bankruptcy process. As I just explained, the fair price-- judging fairness by everyday notions or by economic efficiency or by consistency with the rest of the law--- is the price that could be gotten in good-faith bargaining, which is more than the liquidation value but less than the total value, if there is just one potential buyer. (If there were two potential buyers, then the seller could expect to get the total value, due to their competing bids.) This situation is a bit unusual, because there is only one potential buyer, but it must be pretty common to have one buyer who values the assets at a lot more than any other potential buyer, so that bargaining matters.

Document Excerpts and Some links:

Judge Gonzalez:

Finally, with respect to the consenting First-Lien Lenders, the Indiana Funds question their independence in entering into the compromise to allow the sale of the assets free and clear of the lien. Inasmuch as certain of the individual-consenting lenders were recipients of government loans under the TARP program, the objecting lenders seek to portray the TARPrecipient lenders as being intimidated by the government. A compromise that is not based upon business considerations, including an assessment of litigation risks, would raise issues regarding the Administrative Agent’s obligations, if any to the Indiana Funds, under the agreement. Clearly, that issue is not before this Court.

The Indiana Funds seem to be asking that, if the Court finds that they are bound under the governance provisions of the First Lien Credit Agreement, the Court should nullify the consent given because it was brought about by undue pressure by the U.S. government on the TARPrecipient lenders, who voted to give consent to the transaction before the Court. In the first instance, it is not clear that this Court would even have jurisdiction over this inter-creditor dispute. However, the suggestion that the TARP- recipient lenders have been pressured to the point that they would breach their fiduciary duty and capitulate to the settlements presented is without any evidentiary support. It is mere speculation and without merit.

From the Indiana Pensioners brief:
In approving the Sale Motion, the bankruptcy court specifically relied on the alleged liquidation value of the Collateral in its Sale Order and Sale Opinion as support for approval of the Sale....the bankruptcy court stated that, on the high end, an immediate liquidation would generate $800 million, and therefore, “the First-Lien Lenders will receive a greater return under the proposed sale, which reflects the going concern value, than under a piecemeal liquidation.”

As a preliminary matter, the Debtors’ proffered liquidation value is completely faulty and should not have been relied upon as a basis for the court’s decision. It excludes most of the assets that are in fact the subject of the Sale Motion, locks in the financial performance from the worst historical year ever and uses unprecedentedly low multiples....

The bankruptcy court’s reliance on liquidation value was also improper as a matter of bankruptcy law. Remarkably, the Debtors purport to sell their operating assets with a going concern value of over $25 billion, by somehow rely on a liquidation valuation for purposes of paying the First Lien Lenders....

An article says:
On April 30, Manzo submitted to the court a liquidation analysis he had conducted on Jan. 30. On May 21, he submitted a new liquidation analysis conducted May 20. Manzo said his two assessments differ in important ways.

The latest analysis expects that in a liquidation, Chrysler's main secured creditors would recover $1.2 billion at most. In his Jan. 30 analysis, Manzo predicted they would recover between $654 million and $2.6 billion.

Manzo's 166 page report and his May Declaration

A comment I posted at the Credit Slips blog:

There seems to be an important point of law at issue here though: When assets are sold, is the price fair if it exceeds liquidation value, or is it only fair if it is the amount that a good-faith seller could get by reasonable effort at bargaining with the buyer?

The issue comes up when, as here, there is only one potential buyer. Suppose the assets can be liquidated for $1 billion or sold to a single potential buyer who would pay up to $25 billion. Is a price of $2 billion fair according to the law? Does it matter if the majority of creditors who approve the low price are also the buyers in the deal?

The answer seems obvious to me-- no, the price is too low in that case-- but it seems Judge Gonzalez would allow it. His argument would be that if the creditor would get just $1 billion from liquidation, then a price of $2 billion is an improvement, so they cannot object to it by saying that better bargaining could have gotten a higher price.

Note that this is a point of law-- of how a fair price should be calculated-- rather than the question of what the price should be, exactly. Thus, the Indiana Pensioners didn't have to come up with an alternative price immediately-- the judge would say that whether the buyer value was $2 billion or $25 billion or $200 billion was irrelevant--- tho they would on remand if the judge's legal theory was overruled.

And, of course, I don't know whether the $25 billion is the right figure. That's what an earlier comment in this thread was estimating with going-concern value.


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